investors, angel-investors, stock-optionsThis is my first post here and I’m not well versed in venture and angel investments, so sorry if my question is too naive or stupid.
Anyways, my situation is as follows: I own a company that has developed and patented a system with the potential of earning 10 figures in a 10 years lapse. Please note that this potential has been properly measured by all parts involved and is based on prototype testing and publicly available info (its application would be by the government of my country), so there’s no questions about this: we all agree on this potential, even the investor.
Now, when we went to money talks, the angel offered 100k (US dollars) and he would bring a friend to add another 100k. For that , he requires 33% for each of them. Also, he would add something very important for us: contacts (so it’s a hands-on angel). However, that would mean to give up the company right from the start. Also, that kind of money isn’t a big issue for me, I could simply sell one of my homes (but of course, if I can avoid the risk, then better).
The only REAL thing that matters that he might add and I know I need is contacts. And because of the nature of this system, this addition is of utmost importance. However, if even with these contacts the projects doesn’t work, then I’d be at bar 0, only that having giving my company.
One thing to note: as big as the potential of this project is, without government authorization it’s worth 0 (then again, it can be split in cities or provinces, so if it fails at national level, we could go smaller, or even try other countries, thus that zero worth is relative)
I’m already declining his friend’s involvement. But even then, 33% for 100k on a project that even the investor agreed is a gold mine looks extremely off base. Even considering his contacts contribution.
I took a read to this post which makes a lot of sense, but it doesn’t consider that I’m adding everything while the other part adds a minimum amount of capital (and yes, the contacts). And I profoundly disagree that ideas are worth nothing, but just in case, we don’t only have ideas, but also patents and around 60% of the project already done. IN general, I’m more inclined to the advise provided here in the answer by Trenton Tyler
is this kind of percentage for that kind of money realistic? What kind of percentage should I agree on? Or should I arrange that same percentage only with a bigger amount of money? (Again, money is not an issue for me, so I’m not very prone to this)
Of course I’ll go for advise by professionals, but which kind of professional would be more suited for this? An MBA or a lawyer? (Obviously, I’ll add a lawyer to the mix, but I mean for the financial advise) Or both? Or should look for different professional opinions?
I want to thank everybody who answered because you helped me decide a path of action. One of the reasons why I need these contacts is because
However, based on the answers provided, I already spoke with my lawyer, a financial consultant and a friend who creates and sells startups. They all told me this is crazy, and they offered me to find the investors and contacts for fair shares. They also suggested that, being my project one with really high localization (meaning it can be done in many different cities under different political administrations) I can create micro companies for each local business and then offer stocks to anyone bringing the contacts, which seems very logical to me .
Again, thank you to everybody, I’ll choose an answer as correct as per the site’s requirements, but they all helped me and I wish I could choose all of them
The angel offered 100k (US dollars) and he would bring a friend to add another 100k. For that , he requires 33% for each of them”
Tbh I initially stopped reading there, with the initial thought: nobody is worth that much. Get clients, or another prospective investor involved. You’ll get much better terms. Tell the chap to get lost.
Reading the rest of it… methinks no: this kind of percentage for that kind of money is NOT realistic.
Nobody is worth that much. At the very least, look for competing investors. The terms are nothing short of usurious.
If you can’t find any other investors, still tell the chap to go f*ck himself - politely - if you can afford it and go look for better contacts. Getting into a government isn’t actually that hard; meet them, locate key contacts, network your way in there, and eventually close. It may take a lot more time without a sponsor, but no sponsor is worth two thirds (or a third) of your company in exchange for peanuts if you can survive going through “proper” channels. (And the same for enterprise environments.) If you can afford the extra year or two or three to get the contract, just go in there and sell whatever you’re offering without your sponsor.
If the investor is offering $100K for 33% of the company then he is valuing your company at $300K. Is that what the company is worth?
If you think it can earn 1,000,000,000 (10 figures) in 10 years that seems to seriously undervalue the company. As the return on the investment is 152% a year for your angel given that evaluation.
BUT what are the risks? Do you currently have a working product? Do you need the cash to finish the product? Do you need the contacts?
If you need the contacts then 33% may be worth the money as this will seriously shorten the time frame (there is not enough information to really understand what his contact are worth). Do you really need the contacts (then its worth 33% as 100% of nothing is not a lot). But if you can get in the door without the contacts then they become a lot less valuable (even if it takes longer).
As you mentioned you had access to selling a house, do a basic spreadsheet first, and in Cash Flow Spreadsheet, list the following.
a. The proposed income, year - on - year over the 10 years, base your income on income via your proposed contacts.
b. In your expenses, put in an expense for Hiring a company or person with ability to reach those contacts
Then when you have allocated the income and expenses, and you have a clearer financial picture of your business model, then you can value your business prior to making a decision. Should you need help with the spreadsheet, see an accountant.
If you do not have any idea of how to get the contacts you need, you can go back to the angel investor and re negotiate , for the same amount of capital, but for a far smaller percentage of the company.
To do your homework on actual realistic income and expenses, is a must, then take it to an accountant for an overview, then re-assess . Please be accurate with the expense of finishing the project, or as accurate as you can. You mentioned that the project is 60% finished, but you have not indicated the realistic cost, so put that cost into your cash flow.
If you can manage to self- fund both the start of your business, and the acquisition of the contacts, then go down that path and your scale - up plans, will be achieved much quicker.
Larger amounts of money may be necessary as you scale up.
One final point is that if you can fund the last 40% of the project yourself, perhaps you can re-negotiate with the investor on a “investor supplies the contacts “ basis, and specify exactly what the role of the investor might be, with regard to the contacts. for example, will the investor use the contacts to generate income himself, for the company, therefore guaranteeing an income stream? and if so , ask him to specify how that would be done, with how many employees , what expenses the investor might pay, or expenses dealing with the contacts, by the investor, and what expenses your company might pay.
Should you feel uncomfortable with the particular investor, then seek further investment by other means, for example contacting Chartered Accountants for advice, they can occasionally provide investors for you, depending on their clientelle.
You have not detailed the use of the $100,000 Capital from the investor , so the suggestions outlined I have based on the information provided. Hope that helps.
All content is licensed under CC BY-SA 3.0.